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OPEC Not Expected To Deliver All The Promised Cuts

OPEC is not expected to deliver all of its promised cuts, with compliance expected at around 60 to 70 percent, the chief executive of Geneva-based independent tanker tracking company Petro-Logistics told Reuters in an interview published on Thursday.

At the previous coordinated cartel action to cut supply in 2008-2009, Petro-Logistics estimated that OPEC would succeed in reaching 60-70 percent of the promised cuts.

“This time we expect the core OPEC – Saudi, UAE and Kuwait – to largely stick to their commitments, which alone should result in about 50 percent cut compliance. With a bit of help from the other members, we should see 60-70 percent compliance once again,” the CEO of Petro-Logistics, Daniel Gerber, told Reuters.

With this estimate, Petro-Logistics joins the ranks of the skeptics that believe OPEC will not be able or willing to cut output as promised. Analysts had been questioning the cartel’s commitment to make actual legitimate cuts without cheating even before the deal was announced at the end of November.

According to Petro-Logistics’ Gerber, exempt members Libya and Nigeria, as well as Russia, would be wildcards in the global deal to cut collective supply by nearly 1.8 million bpd, beginning in January.

“Russia doesn’t have the best history of joining OPEC cuts, they are another big wild card,” the manager told Reuters.

A week before OPEC announced that it reached a deal to cut production, Petro-Logistics considered three scenarios and how the outcome would impact global oil supplies and prices. In scenarios 2 and 3, Petro-Logistics was very close to what’s happening now.

In scenario 2, Petro-Logistic expected that “OPEC continues trialing the recent practice of using communicating as a tool to steer the market without the need for physical intervention,”.

In scenario 3, Petro-Logistics was expecting OPEC to collectively reduce output to between 32.5 million bpd and 33 million bpd, with the Saudis carrying a higher proportion of the cut, but all or substantially all members contributing. “Working against this scenario are the twin concerns of increased supply from Russia and the U.S. and the prisoners dilemma that highlights to each OPEC member that they are best off if everyone else complies and they cheat,” Petro-Logistics said a week before November 30.

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What cuts are we to expect from OPEC? Cuts to 32.5 mb/d or a cut of 1.2 mb/d. They are not the same given OPEC'S increasing output as a moving target. They haven't yet explained how they will resolve the mismatch. Russia isn't stupid. This gives them an out either way to not cut production since OPEC's deal doesn't add up from the very start.

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